Market Sizing & Estimated Profitability

Let’s discuss our ideas and their feasibility.

There are many various templates that can be used to analyze a business whether it be market competitiveness, validity within a certain market, rationale for growth or expansion. I will try to dive into those at some point, but I believe most of those exist best when a business is already operating. As it stands, I don’t have a business! My intended approach to this isn’t the bona fide way of doing things, but it’s what I currently know.

The best questions to answer with a business idea are:

1.) Is my service / product profitable?

2.) How profitable?

The best way to test this is to start selling the product and see if there’s a demand for it. This may be the best method if you have a novel product that hasn’t really been tested in a market - unfortunately for you, you’re a pioneer in the space and you have to do a lot of the legwork. This isn’t a bad idea even if you aren’t a pioneer, but there are other ways to assess a market without taking such a large “leap of faith” so to speak.

Oftentimes, there are similarities or comparable services/products that already exist in a market - and that’s where you can start to estimate where your own business would land. If you’re creating something that already has some form of demand, that’s where some fun research can assist with your assessment.

As an example, I did an analysis on the Bar Scene for an Ohio market to determine the overall potential of a bar. Keep in mind, these are estimates - but it still will help paint a picture!

Usually, I’ll start with population sizes - how many total people exist outside of the market I’m trying to serve? Some folks go for entire countries first, but since I know I’m aiming for Columbus, Ohio - I’ll just start there. By the way, a good place to look up a lot of the initial population metrics is in the US Census.

Okay so in the State of Ohio (as of 2020) - there were roughly 905,000 people. This number can fluctuate, and you can add in -X% or +X% if you want to determine any increases or decreases in population, but for this estimate, I think 905k is perfectly fine.

If we’re estimating a Bar business - there are percentages of the population that simply cannot be served, and that would be the under 21 crowd. Because of this, we have to start to breakdown the 905,000 people in Columbus into a population that our service could profit from.

Going back to the Census, 72.45% of the population is 21 and over. So that translates to ~655k people. That’s a great start!

Your research from this point on may become much more varied depending on how you need to break down the serviceable populations. The next questions for this example idea would be:

• How many of those ~655k actually drink alcohol?

• What is the distribution of alcoholic preference: beer / wine / spirits?

• What are the income ranges that spend the most at bars?

• What competition is within this area?

• What % of the competitive market can I estimate to earn?

Ultimately, I’m landing on something called a “Target Population” which should more narrowly show how many people could predictably show up at your business over a given set of time.

With this Target Population - the goal is to determine an estimated profit model - so for the bar business we can just do a high-level estimate of profits. Additional questions such as:

• What are the costs of X Beer or Y Liquor? (materials or inventory)

• What are common markups / pricings for different drinks

• Most importantly - WHAT IS THE MARGIN!?

  • Margin is the most important aspect that you’d want to take into account for your products/services, as it will determine your overall revenue potential once you deduct operating costs.

Overall, with this Bar as an example - I was able to determine the following:

• Target Population of ~80k - this includes:

  • City Population % over 21 that goes to Bars

  • Population % that has Income over $60k (tends to go out more)

• Given time spent in Bar is 1 hour

• Given operation is 8 hours (being conservative)

• Target Margins for Beer / Liquor / Wine - est. 75%

• Open Fridays and Weekends during the year

• Taking into account estimated bar capacity per hour (can vary)

I was able to determine potential profits for Beer, Wine, and Liquor sales. After removing costs such as workforce, materials, and replenishing inventory, I landed on a rough estimate of $216K Net Revenue. Now you will also have to take rent into consideration, which would vary depending on where this bar is located. The more expensive the areas may have more traffic, but you have to fight harder to cover those costs on a monthly basis. Things such as weather need to be taken into consideration to determine seasonality of foot traffic.

There’s a lot to consider - but with an estimate of $216k, I’d say it’s a reasonable estimate for a highly competitive business market.

This analysis exists in a vacuum, but at the very least it can show that it has the potential to be profitable, and that’s what we were trying to achieve.

I’d encourage you all to give Market Estimating a try and continue to work on it! It’s pretty fun and encouraging to see the potential of the ideas you have.

My goals in the upcoming days is to take my initial ideas that deal with Celiac Disease focused products or services and determine their own market size and profitability.

-Z